- January 18, 2022
- Posted by: ISSLServ
- Category: Bookkeeping
One of the most common problems in approving construction invoices is double payment. Most construction businesses are honest, and a double billing could simply be a mistake. Other times, subs and suppliers may attempt to use invoice sleight of https://www.bookstime.com/ hand. They might bank on the fact that construction offices are inundated with paperwork, hoping for a quick glance and approval of their invoice. Keep a close eye on the description of the work claimed to be performed, and the line item dates.
Common Contract Structures
However, retainage can lead to significant cash flow challenges for contractors, who may lack the working capital necessary to take on new jobs if earned income is withheld. Understanding each contract type and knowing which projects call for a certain type of contract will help construction businesses keep track of their costs and revenue more accurately. Learn about the construction industry’s accounting methods, such as accrual and cash, to handle long-term contracts and revenue recognition like CCM and PCM. This billing process occurs alongside the project, either based on a payment schedule (i.e., weekly, monthly) or project milestones.
What Is Construction Billing?
If a contractor cannot provide adequate documentation to justify costs, it can cause serious problems. Another drawback can result from reduced cash flow, as cost-plus contracts require the contractor to front most project costs. Payment issues can happen for several reasons, including the owner running out of money to pay or forgetting about it. Whatever the case, it is excellent practice to follow up on your invoices to remind the client that the payment date is approaching. Professional construction billing software can help you keep track of due dates and determine the best time to approach the client for a reminder. There are different types of billing methods depending on the project’s scope, the client’s preferences, and the contractor’s financial capabilities.
Unit price billing method
Many construction contracts are structured with retainage, meaning some of the contract price isn’t due until the contract is complete. This isn’t an accounting method in itself—it’s more a recognition that these kinds of contracts have to be accounted for in specific ways. As the name implies, this method recognizes revenue only after you’ve completed the contract (or reached substantial completion).
- If a contractor cannot provide adequate documentation to justify costs, it can cause serious problems.
- While the IRS still requires PCM as outlined above, ASC 606 works a little differently.
- That’s why most construction businesses use more sophisticated accounting methods that enable more active financial management practices.
- Construction management software can often integrate directly with accounting software to simplify and even automate the exchange of project and financial data.
- Contractors should include all approved change orders that are invoiced in the current billing cycle along with the payment application.
- In construction accounting, financial experts typically use software, general ledgers, and specialized methods as one system.
Billing method #4: AIA progress billing
The invoicing process will vary based on the contract agreed upon between the owner and the general contractor, but larger construction projects will most likely be on a progress billing structure. It is essential Construction Billing Methods to keep your invoices as detailed as possible to avoid billing disputes and payment delays. Relying on digital tools to generate invoices is the best way to avoid the error-prone nature of manual invoicing.
Construction accounting basics
Billing for Success
- Most of the time, this isn’t a huge problem — until too many changes pile up.
- Construction billing always refers back to the contract terms that dictate how contractors will charge for their work.
- Arrears billing occurs after the completion of a project and, like advanced billing, is often collected as a lump sum payment.
- Moon Invoice offers payment reminders, which can help ensure that invoices are paid on time.
- Still, smaller construction companies can record their transactions in spreadsheets or another simple format.
- Payment applications are used when payment is received, which then must be applied to an account balance.
